When will the penny drop? Every month thousands of pension savers go it alone when making complex financial decisions that research suggests most do not fully understand. Yet Parliament has spurned its chance to shepherd them towards the support they need.
That leaves us in limbo. Despite a pressing need to create a new social norm of taking guidance or advice before taking pension cash, the Financial Guidance and Claims Act, which last week received Royal Assent, does not have the legal teeth to encourage higher take-up.
Neither has the government sent a strong enough signal that it expects the Financial Conduct Authority (FCA) to go into battle to help retirees help themselves before it is too late. Instead we have a softly-softly approach taking baby steps – a consultation here, a pilot project there – but definitely no rocking the boat.
Let’s remind ourselves what is at stake. Pension freedom is popular but perhaps not for all the right reasons. It does not guarantee anyone a penny more income in retirement. And having flexibility to withdraw cash when you want can come at a longer-term cost. Its most ardent supporters are scammers and anyone profiting from unsuitable defined benefit to defined contribution transfers.
Most people accept there will be winners and losers even if they cannot agree on how many of each. Even the policy’s instigator, George Osborne, recognised the potential for disaster, which is why he simultaneously created free and impartial pension guidance.
Consumer-facing organisations are alert to the possibilities and the pitfalls. Pensions Advisory Service chief executive Michelle Cracknell told MPs last month it was clear a “nudge is not sufficient”. “There needs to be an intervention such as a mid-life MOT or default guidance,” she told the Treasury Select Committee.
Amendments to the Bill to promote default guidance were put forward in the House of Lords and by MPs on the Work and Pensions Committee, who were keen to see an active rather than passive decision for anyone choosing to opt out of receiving guidance. Their proposal required people to opt out via the impartial guidance provider to ensure it was independent of providers, who often have a vested interest in controlling the sales process with their own customers.
Rather than imposing a stronger nudge, the government has instead chosen to “lay the foundations” for the nudge. This effectively passes the buck to the FCA and delays any action. My advice is not to hold your breath hoping to see a new building emerge from those foundations.
In evidence to the Treasury Select Committee this week, FCA director of strategy and competition Chris Woolard told MPs he did not think it was within the regulator’s powers to try to change consumer behaviour for the better, saying: “If there is a social norm to be set, that is for government and parliament to take a view on.”
This is an issue that is not going away. As we wait for the Retirement Outcomes Review final report to learn how it is going to tackle the risks to consumers who are purchasing drawdown without advice, it could be worth revisiting some of the consumer research carried out for the FCA among those who have accessed pension cash.
Among the factors they did consider were: how much have I got, how much is tax-free and how quickly can I get hold of this money? Factors they did not consider were: how much will I be spending in retirement, how long will I live for and how much will I need to have saved to fund this?
Basic information
Given some basic information about longevity and generating income in retirement – the same points they would have heard in a guidance session – researchers noted they became noticeably less happy and enthusiastic. Many respondents were said to have had a ‘penny drop’ moment during these discussions, which made them start to question whether they had acted too hastily, without understanding all the facts.
We should not expect people to make complex pension decisions alone. And we cannot even expect many of them to recognise the complexity or even to know that help is freely available. They may not understand but government – those who were happy to see the default guidance can kicked down the road – have no excuse.
The dogma to allow people to make their own mistakes without intervening is fostering an unhealthy complacency that all is well. Many drawdown providers talk of evidence that withdrawals are sustainable, even while their own figures scream the exact opposite – average drawdown rates above 6% with two in five above 10%. Sustainable?
Clearly, all is not well and default guidance is our best defence for those in middle Britain who are not benefitting from regulated financial advice. When will the penny drop?
Stephen Lowe is group communications director at Just Group